Mudflation, from MUD and inflation, is an economic issue that exists in massively multiplayer online games. Mudflation occurs when future additions to (or even just continued operation of) a game causes previously acquired resources to decline in value. This can take many forms and have many causes, including new items introduced by an expansion pack, fundamental imbalances in the in-game economy, or even spread of information that allows a previously rare resource to be acquired more easily.

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The term mudflation became popular during the height of the MMORPGEverQuest's dominance, coming into common usage after the release of the Ruins of Kunark (2000) expansion. The term originated many years prior with MUDs, the text based forerunner of MMORPGs, that also suffered from the same currency supply problems. According to Google Groups, the earliest Usenet posting that used this term was from April 1993.[1]

The real world impact of various kinds of mudflation have increased dramatically as game operators have incorporated real-world currency trading into games. An obvious direct impact for an operator is that more and more powerful items may need to be sold to generate a given revenue stream; for players, it may be a rapidly declining value of a purchased item. Ever increasing power can quickly cause issues with game mechanics, while rapidly declining value may serve to alienate and drive away players.

Many games also have their own internal currency to facilitate in-game trade. Proper balance of an in-game economy becomes extremely important if it is desired to have an exchange rate linkage between the internal currency and a real world
currency, such as the US Dollar. Mismanagement or imbalance can result in real-world financial losses with legal impacts.

Problems with the fundamental economic model of the game are typically observed as a continuous decline in the valuation of the game currency. Often the problem can be traced back to those running the game, who have set up a policy to give away the game currency to its members as a game function, with little to no way to actually remove money from the economy. This policy causes an ever-increasing amount of game currency in circulation and a subsequent decline in value.

Removal of currency from circulation is substantially harder than introducing it as a reward for player actions. Players actively pursue awards and tend to accumulate them; the currency reward will only be given up if there is sufficient reason or something of higher value to be gained.

While removal of currency is more difficult than addition, more focus has been given to it than to regulating currency sources. The primary tool for removal of currency is to add money sinks, or features designed to remove money from the game. Dynamic and self-adjusting money sinks have begun to be discussed and implemented as well.

Addressing the influx of currency is less common, possibly because modifying in-game rewards is less palatable to players than pricing changes for purchases. Nevertheless, dynamic adjustment of currency sources is to be found in a handful of games.

Money sinks are features of the game designed to combat mudflation by removing money from the game rather than adding to it. Money is typically added by some in-game action, such as completion of a quest or killing of a monster. These events can happen repeatedly, sometimes thousands of times per day, and is the major contributing factor to economic mudflation. Money sinks are designed to permanently remove some of this money from the game to combat this effect.

Some examples include:

Buying upgrades from the game;

Buying food, potions and supplies from the game that will be consumed during play;

Buying services from the game such as healing, item repair, transportation throughout the game world, or storage space (or storage time) for current or extra items;

Item degradation: items may have a small chance to degrade or break when used, repairing or replacement cost time and/or money;

Selling items to NPC "pawnbrokers" who resell them to other players at a substantial markup.

For example, in Dungeons and Dragons Online, players can mail items to other characters, have curses removed, or gamble with NPCs, all for an appropriate fee.

One shortcoming of many money sinks is that they do not match the rate at which the players create money through normal play, so mudflation, while slowed by the sinks, is not completely halted. One idea is to increase the cost of money sinks as the supply of money goes up, in hopes of finding a homeostasis for money coming into the game and money going out. The challenge of dynamic money sinks is that care must be taken to make sure new players are not priced out of the market for virtual goods and services needed to play the game. An example of a dynamic money sink in many MMOs is a reduction in travel times, for example by the purchase of a mount. The mounts or other forms of faster travel cost large amounts of money but have a bonus only in convenience thus acting as a dynamic money sink only taking money away from the people who have an excess of it.

World of Warcraft uses a repair system to act as a dynamic money sink. For a starting character, repair costs are very small. As the character progresses, repair costs get more expensive to counter the increased money gain.
Another example of a dynamic money sink is the fee charged to use the auction house. A percentage of the sale price on all auction house purchases is taxed by the game, removing that money from the system. Because it is a percentage, in times of inflation more money will be removed from the system, helping to curb the inflation.

Eve Online has a player-driven economy with some NPC merchants who curb inflation by fixing the prices of many items. Basic blueprints and skill books bought from NPCs are inexpensive, even for new players; however advanced blueprints and skill books, such as those required for capital ship production and flight are thousands of times more expensive. These are generally only of interest to veteran players, reflecting the desire to remove money in proportion to each player's wealth.

A more recent addition to the concept of dynamic sinking is the use of a feedback control system to moderate dynamic sinking, and possibly to moderate dynamic sourcing as well. Such systems can be designed to maintain a set of prices or asset ratios, and if properly set up can add a great deal of price stability to a virtual economy; one example of this can be found in the MMO MUD Alter Aeon.[2] Most game designs have a small amount of feedback by default, but explicit and strong feedback is what designates this category.

Besides the continuous decline due to the existence of persistent world per se (i.e. allowing the repetition of an identical action over time with the same participants to move currency), there is a second group of factors based on characters in game increasing their power due to playing.

The most obvious effect comes from level: If a character of level L can do a (combat) action to gain a reward in a timeframe T. a character of a higher level L' can do the same (combat) action to get the same reward in a shorter timeframe T'. (E.g. a level 10 character can kill a mob of level 10, gaining 5 silver in 180 seconds, a level 20 character can do the same in 60 seconds.) As the increase in power due to levels is usually not linear, the reward per time also increase accordingly.
The effect is intensified by the increase of the power of the items the character is using: As the character level increases, the character is also able to use more powerful items (or other means of character customization). Each acquired more powerful item also decreases the required timeframe to complete a (combat) action. Therefore, access to items of better quality automatically increases the source of currency for the player. As the player cannot use the same item type multiple times, the more powerful item automatically decreases the value of items of lesser quality for this player, and as the mass of players level, the weaker item in itself starts to lose its market value.

Another major factor sources in the cycle of adding 'high-end content'.
To retain players for a long time, new content has to be added over time, e.g. Everquest added two expansions per year between 2002 and 2007, World of Warcraft added about one major expansion every two years (and a number of smaller additions that increased potential character power).
Those expansions are usually targeted at the highest level to reach the largest audience. Often they also increase the maximum level a character can reach to encourage players into buying the expansion: Everquest started with a maximum level of 50, World of Warcraft with 60, both have increased that number multiple times.

This already compounds on the 'leveling' factor by itself.

But even if the maximum level is not increased, the expansion does increase the characters' power in some other way: The rewards for playing the content of the expansion tend to be substantially better than rewards of content released before the expansion, even when target audience is the same.
To pick up the reference from the historic section: When Everquest added the Kunark expansion, they also added a new race ('Iksar') which had a starting ground on their own. Playing in that starting ground as non-Iksar was riskier (as the guards patrolling the area were Iksar and therefore not friendly to non-Iksar races), but also substantially more rewarding.
The same effect can be seen in World of Warcraft: Completing level 60 quests in the 'old world' (Silithus, Eastern Plaguelands) yields substantially inferior rewards to level 60 quests in the expansion's (Burning Crusade) entry areas, similarly level 70 quests in the Burning Crusade (Shadow Moon Valley, Netherstorm) are by far surpassed by the counterparts in the next expansion's (Lich King) entry areas.
Major currency value is assigned and spent on the highest currently available item 'tier' (a tier is basically a group of items of similar power which can be acquired with similar effort), while previous tiers drop out of availability as their greatly reduced relative value doesn't merit the effort required to acquire them.
One very obvious downside to the model is the 'stat explosion" on items. Items have a number of attributes ('stat' is short for statistics) which describe their value. To make an expansion item highly desirable when a similar item already exists, the new item has to have substantially improved attributes. This factor has to be applied to all the items of the expansion (to keep their relative value consistent).

In one step, this effect renders whole groups of rewards from highly sought for to worthless in factors that far surpass any effect from the standard continuous decline due to the repeatability of actions.